U.S. patent number 7,346,567 [Application Number 10/064,228] was granted by the patent office on 2008-03-18 for conditional fee ownership home financing system and business method.
This patent grant is currently assigned to REIT Contact, LLC. Invention is credited to Stephen M. Weeks.
United States Patent |
7,346,567 |
Weeks |
March 18, 2008 |
**Please see images for:
( Certificate of Correction ) ** |
Conditional fee ownership home financing system and business
method
Abstract
A method and system for financing the purchase of real property
utilizing a conditional fee simple deed. Under this method a
conditional fee purchaser and a conditional remainder purchaser
enter into a conditional fee agreement, delineating the rights and
responsibilities of each party with regards to the purchase of a
residential property. The agreement includes a determination date,
at which time, the conditional remainder purchaser will either
receive the entire fee simple interest in the property or will
receive a lump sum payment from the conditional fee purchaser for
the conditional remainder purchaser's interest in the real
property. The conditional fee agreement includes a list of
conditions under which the property will pass directly to the
conditional remainder purchaser prior to the determination
date.
Inventors: |
Weeks; Stephen M. (Tucson,
AZ) |
Assignee: |
REIT Contact, LLC (Tucson,
AZ)
|
Family
ID: |
29731605 |
Appl.
No.: |
10/064,228 |
Filed: |
June 21, 2002 |
Prior Publication Data
|
|
|
|
Document
Identifier |
Publication Date |
|
US 20030236733 A1 |
Dec 25, 2003 |
|
Current U.S.
Class: |
705/35 |
Current CPC
Class: |
G06Q
40/00 (20130101); G06Q 40/02 (20130101); G06Q
40/04 (20130101) |
Current International
Class: |
G06Q
40/00 (20060101) |
Field of
Search: |
;705/10,36,35 |
References Cited
[Referenced By]
U.S. Patent Documents
Foreign Patent Documents
Other References
Razzi, Elizabeth, Buying a home in a buyer's market, Apr. 1996,
Kiplinger's Personal Finance Magazine, p. 64. cited by examiner
.
National Australia Bank, Home Glossary,
www.national.com.au/Personal Finance/0,,77228,00.html. cited by
examiner .
Curry, Peter, Mortgage Contigency clauses, Long Island Business
News, Sep. 4, 1995. cited by examiner .
Larson, Michael D., Hard money lenders: The source for last resort
loans, Apr. 27, 2001, www.bankrate.com/brm/news/mtg/20000831.asp.
cited by examiner .
Seasongood, Murray, Drastic Pledge Agreements, Harvard Law Review,
Jan. 1916, vol. 29, No. 3, pp. 277-290. cited by examiner .
Waggoner, Lawrence, Reformulating the structure of estates, Feb.
1972, Harvard Law Review, vol. 85, Issue 4, p. 729. cited by
examiner .
100% or Greater Financing,
www.ifshomeloans.com/purchase/100-percent-or-greater-financing.html.
cited by examiner .
Ahli Bank, Manzil Home Purchase Plans, 1997,
www.iibu.com/buy.sub.--home/murabahow.htm. cited by
examiner.
|
Primary Examiner: Trammell; James P.
Assistant Examiner: Basit; Abdul
Attorney, Agent or Firm: Polsinelli Shalton Flanigan
Suelthaus PC
Claims
The invention claimed is:
1. A method for financing a real estate transaction between a
conditional fee purchaser and a conditional remainder purchaser,
said method comprising: (a) executing a conditional fee agreement
with regards to purchasing real property between said conditional
fee purchaser and said conditional remainder purchaser, said
conditional fee agreement having a determination date; (b)
executing a real estate sales contract between said conditional fee
purchaser, said conditional remainder purchaser, and a seller of a
piece of real property; (c) payment by said conditional fee
purchaser to the seller of the amount owed by said conditional fee
purchaser under the real estate sales contract; (d) payment by said
conditional remainder purchaser of closing costs and down payment
for the purchase of said real property as required under the real
estate sales contract; (e) recording of the deed containing
conditional fee language by the seller, after all closing
requirements are met; and, (f) receipt by said conditional
remainder purchaser on said determination date of either a fee
simple interest in said real property, or a payment for said
conditional remainder purchaser's share of said fee simple interest
by said conditional fee purchaser, wherein the conditional
remainder purchaser receives an ownership interest in the real
property only upon receipt of the fee simple interest on said
determination date.
2. The method of claim 1, wherein said conditional fee agreement
comprises: (a) said conditional remainder purchaser paying a down
payment to the seller; (b) said conditional remainder purchaser
paying closing costs for the sale of said real property; (c) said
determination date when said fee simple interest will rest in
either said conditional fee purchaser or said conditional remainder
purchaser; and, (d) conditions upon which said fee simple interest
will automatically vest in said conditional remainder purchaser,
prior to said determination date.
3. The method of claim 1, wherein said conditional fee purchaser
finances the payment due the seller through a financial institution
and said conditional remainder purchaser guarantees said
conditional fee purchaser's loan with the financial
institution.
4. The method of claim 1, wherein said conditional fee purchaser
pays the seller cash for said conditional fee interest in said real
property.
5. The method of claim 2, wherein the conditions upon which said
fee simple interest automatically vests in said conditional
remainder purchaser comprise the group consisting of said
conditional fee purchaser's failure to pay to conditional remainder
purchaser a fixed dollar amount less than the fair market value on
the determination date, said conditional fee purchaser's failure to
pay to said conditional remainder purchaser a fixed dollar amount
above the fair market value at the date the conditional fee
agreement goes into effect on said determination date, initiating
of collection actions by the financial institution against said
conditional fee purchaser, initiation of foreclosure action by the
financial institution against said conditional fee purchaser, said
conditional fee purchaser's failure to pay property taxes on said
real property, said conditional fee purchaser's failure to maintain
hazard insurance on said real property, said conditional fee
purchaser's failure to maintain flood insurance, if applicable, on
said real property, and combinations thereof.
6. The method of claim 1, wherein said conditional remainder
purchaser is the seller of said real property.
7. The method of claim 3, wherein said conditional remainder
purchaser is the financial institution.
8. The method of claim 3, wherein said conditional remainder
purchaser does not guarantee said conditional fee purchaser's loan
with the financial institution.
9. The method of claim 8, wherein an initiation of a collection
action by a financial institution does not automatically vest the
fee simple interest in said conditional remainder purchaser.
10. The method of claim 8, wherein an initiation of a foreclosure
action by the financial institution does not automatically vest the
fee simple interest in said conditional remainder purchaser.
11. The method of claim 1, wherein the price said conditional fee
purchaser is to pay said conditional remainder purchaser on said
determination date is a fixed price at the time of entering said
conditional fee agreement.
12. The method of claim 1, wherein the price said conditional fee
purchaser is to pay said conditional remainder purchaser at said
determination date is said amount of the fair market value of said
real property on said determination date.
13. A method for financing a real estate transaction between a
conditional fee purchaser and a conditional remainder purchaser,
said method comprising: (a) storing in a computer system
information relating to said conditional fee purchaser, said
conditional remainder purchaser, and said real estate transaction;
(b) negotiating and executing a conditional fee agreement with
regards to purchasing real property between said conditional fee
purchaser and said conditional remainder purchaser, said
conditional fee agreement having a determination date; (c) storing
information in the computer system relating to said conditional fee
agreement; (d) executing a real estate sales contract between said
conditional fee purchaser, said conditional remainder purchaser,
and a seller of a piece of real property; (e) storing information
in the computer system relating to said the piece of real property
and the seller; (f) payment by said conditional fee purchaser to
the seller of the amount owed by said conditional fee purchaser
under the real estate sales contract; (g) payment by said
conditional remainder purchaser of closing costs and down payment
for the purchase of said real property as required under the real
estate sales contract; (h) recording of the deed containing
conditional fee language by the seller, after all closing
requirements are met; and, (i) receipt by said conditional
remainder purchaser on said determination date of either a fee
simple interest in said real property, or a payment for said
conditional remainder purchaser's share of said fee simple interest
by said conditional fee purchaser, wherein the conditional
remainder purchaser receives an ownership interest in the real
property only upon receipt of the fee simple interest on said
determination date.
14. The method of claim 13, wherein said conditional fee agreement
comprises: (a) said conditional remainder purchaser paying a down
payment to the seller; (b) said conditional remainder purchaser
paying closing costs for the sale of said real property; (c) said
determination date when said fee simple interest will rest in
either said conditional fee purchaser or said conditional remainder
purchaser; and, (d) conditions upon which said fee simple interest
will automatically vest in said conditional remainder purchaser,
prior to said determination date.
15. The method of claim 13, wherein said conditional fee purchaser
finances the payment due the seller through a financial institution
and said conditional remainder purchaser guarantees said
conditional fee purchaser's loan with the financial
institution.
16. The method of claim 14, wherein the conditions upon which said
fee simple interest automatically vests in said conditional
remainder purchaser comprise the group consisting of said
conditional fee purchaser's failure to pay to conditional remainder
purchaser a fixed dollar amount less than the fair market value on
the determination date, said conditional fee purchaser's failure to
pay to said conditional remainder purchaser a fixed dollar amount
above the fair market value at the date the conditional fee
agreement goes into effect on said determination date, initiating
of collection actions by the financial institution against said
conditional fee purchaser, initiation of foreclosure action by the
financial institution against said conditional fee purchaser, said
conditional fee purchaser's failure to pay property taxes on said
real property, said conditional fee purchaser's failure to maintain
hazard insurance on said real property, said conditional fee
purchaser's failure to maintain flood insurance, if applicable, on
said real property, and combinations thereof.
17. The method of claim 15, wherein said conditional remainder
purchaser is the financial institution.
18. The method of claim 13, wherein the price said conditional fee
purchaser is to pay said conditional remainder purchaser on said
determination date is a fixed price at the time of entering said
conditional fee agreement.
19. The method of claim 13, wherein the price said conditional fee
purchaser is to pay said conditional remainder purchaser at said
determination date is said amount of the fair market value of said
real property on said determination date.
20. The method of claim 13, wherein said method further comprises
storing in a computer system information relating to a financial
institution used by conditional fee purchaser to finance the
payment due the seller.
21. A method for investing in real property, wherein said investor
is a conditional remainder purchaser, said method comprising said
conditional remainder purchaser: (a) identifying a third party who
wishes to purchase a piece of real property, said third party to be
known as a conditional fee purchaser; (b) negotiating and executing
a conditional fee agreement with said conditional fee purchaser,
said conditional fee agreement having a determination date; (c)
locating a piece of real property, which said conditional remainder
purchaser and said conditional fee purchaser are interested in
purchasing; (d) executing a real estate sales contract between said
conditional remainder purchaser, said conditional fee purchaser,
and a seller of said piece of real property of interest; (e) paying
the seller of said piece of real property of interest a down
payment and covering closing costs for the purchase of said real
property, as required under the real estate sales contract and the
conditional fee agreement; (f) ensuring said conditional fee
purchaser pays the seller the amount owed by said conditional fee
purchaser for said piece of real property under the real estate
sales contract; (g) ensuring a deed containing conditional fee
language agreed to in said conditional fee agreement is recorded by
the seller, after all closing requirements are met; and, (h)
receiving on said determination date either a fee simple interest
in said real property from said conditional fee purchaser, or a
payment for said conditional remainder purchaser's share of said
fee simple interest by said conditional fee purchaser, wherein the
conditional remainder purchaser receives an ownership interest in
the real property only upon receipt of the fee simple interest on
said determination date.
22. The method of claim 21, wherein said conditional fee agreement
comprises (a) said conditional remainder purchaser paying a down
payment to the seller; (b) said conditional remainder purchaser
paying closing costs for the sale of said real property; (c) said
determination date when said fee simple interest will rest in
either said conditional fee purchaser or said conditional remainder
purchaser; and, (d) conditions upon which said fee simple interest
will automatically vest in said conditional remainder purchaser,
prior to said determination date.
23. The method of claim 21, wherein said conditional fee purchaser
finances the payment due the seller through a financial institution
and said conditional remainder purchaser guarantees said
conditional fee purchaser's loan with the financial
institution.
24. The method of claim 22, wherein the conditions upon which said
fee simple interest automatically vests in said conditional
remainder purchaser comprise the group consisting of said
conditional fee purchaser's failure to pay to conditional remainder
purchaser a fixed dollar amount less than the fair market value on
the determination date, said conditional fee purchaser's failure to
pay to said conditional remainder purchaser a fixed dollar amount
above the fair market value at the date the conditional fee
agreement goes into effect on said determination date, initiating
of collection actions by the financial institution against said
conditional fee purchaser, initiation of foreclosure action by the
financial institution against said conditional fee purchaser, said
conditional fee purchaser's failure to pay property taxes on said
real property, said conditional fee purchaser's failure to maintain
hazard insurance on said real property, said conditional fee
purchaser's failure to maintain flood insurance, if applicable, on
said real property, and combinations thereof.
25. The method of claim 21, wherein said conditional remainder
purchaser is the seller of said real property.
26. The method of claim 23, wherein said conditional remainder
purchaser is the financial institution.
27. The method of claim 23, wherein said conditional remainder
purchaser does not guarantee said conditional fee purchaser's loan
with the financial institution.
28. The method of claim 27, wherein an initiation of a collection
action by a financial institution does not automatically vest the
fee simple interest in said conditional remainder purchaser.
29. The method of claim 27, wherein an initiation of a foreclosure
action by the financial institution does not automatically vest the
fee simple interest in said conditional remainder purchaser.
30. The method of claim 21, wherein the price said conditional
remainder purchaser is to receive from said conditional fee
purchaser on said determination date is a fixed price at the time
of entering said conditional fee agreement.
31. The method of claim 21, wherein the price said conditional
remainder purchaser is to receive from said conditional fee
purchaser at said determination date is said amount of the fair
market value of said real property on said determination date.
32. A method for purchasing real property, wherein said purchaser
is a conditional fee purchaser, said method comprising said
conditional fee purchaser: (a) identifying a third party who wishes
to invest in real property, said third party to be known as a
conditional remainder purchaser; (b) negotiating and executing a
conditional fee agreement with said conditional remainder
purchaser, said conditional fee agreement having a determination
date; (c) locating a piece of real property, which said conditional
fee purchaser and said conditional remainder purchaser are
interested in purchasing; (d) executing a real estate sales
contract between said conditional fee purchaser, said conditional
remainder purchaser, and a seller of said piece of real property of
interest; (e) paying the seller the amount owed by said conditional
fee purchaser for said piece of real property under the real estate
sales contract; (f) ensuring said conditional remainder purchaser
pays the seller of said piece of real property of interest a down
payment and covering closing costs for the purchase of said real
property as required under the real estate sales contract and the
conditional fee agreement; (g) ensuring a deed containing
conditional fee language agreed to in said conditional fee
agreement is recorded by the seller, after all closing requirements
are met; and, (h) on said determination date, either giving a fee
simple interest in said real property to said conditional remainder
purchaser, or paying said conditional remainder purchaser for said
conditional remainder purchaser's share of said fee simple
interest, wherein the conditional remainder purchaser receives an
ownership interest in the real property only upon receipt of the
fee simple interest on said determination date.
33. The method of claim 32, wherein said conditional fee agreement
comprises: (a) said conditional remainder purchaser paying a down
payment to the seller; (b) said conditional remainder purchaser
paying closing costs for the sale of said real property; (c) said
determination date when said fee simple interest will rest in
either said conditional fee purchaser or said conditional remainder
purchaser; and, (d) conditions upon which said fee simple interest
will automatically vest in said conditional remainder purchaser,
prior to said determination date.
34. The method of claim 32, wherein said conditional fee purchaser
finances the payment due the seller through a financial institution
and said conditional remainder purchaser guarantees said
conditional fee purchaser's loan with the financial institution.
Description
FIELD OF INVENTION
The present invention relates to the financing of real property,
specifically, residential housing. More particularly, the invention
relates to a method of financing residential housing based on a
conditional fee simple deed in order to acquire interest in the
residential housing at a comparative cost savings.
BACKGROUND OF INVENTION
Home ownership has traditionally been limited to those people who
are able to save enough money to provide both a down payment and
cover the closing costs of the real estate transaction. A typical
residential purchase requires the potential homeowner to provide at
least 10% of the cost of the home as a down payment, along with
these closing costs. This can make home ownership prohibitive for a
large portion of the population.
Due to the prohibitive cost of purchasing a first home, a large
segment of the population is deprived of the advantages of home
ownership. These advantages include tax advantages, such as credits
for property tax payments and interest deductions, along with
intangible advantages, such as the pride of owning a home, and the
ability to have a home customized to the property owner's
liking.
The segment of the population that cannot afford home ownership
usually ends up in a leasehold arrangement in which the landlord
owns the property, and the tenant must pay rent on a regular basis.
Thus, the landlord retains the advantages of owning real property,
while the tenant has a place to live but none of the advantages of
home ownership. Further, the landlord can raise the rent at the end
of a tenancy, requiring the tenant to either pay the increased rent
or find a new leasehold to rent.
It should also be noted that a conventional purchase of a fee
simple interest in real property is normally financed over a long
time frame, 20-30 years. However, the average homeowner moves
approximately every five to seven years. Thus, the owner of a fee
simple interest in real property, who wishes to move before the
financing in the real property is paid in full must deal with the
difficulties of finding someone to purchase their fee simple
interest in order to pay off the financing company.
It is desirable to have a method for creating home ownership which
allows the segment of the population, which is currently prohibited
from owning a home, to be able to afford the purchase of
residential real property. It is also desirable to have a mechanism
by which a person can enjoy the benefits and advantages of home
ownership without having to provide a large down payment. It would
further be desirable to have a means of financing the purchase of a
home, which would allow the home owner to subsequently move on
without the difficulties of finding a purchaser for their fee
simple interest.
SUMMARY OF INVENTION
The present invention relates to a conditional fee ownership home
financing system (CoFOHFS) and business method. This method uses a
conditional fee simple deed to acquire interest in residential real
property at a significant cost savings over traditional methods of
home purchases. Thus, the CoFOHFS offers home ownership at costs
normally associated with renting real property
The CoFOHFS business method begins when a conditional fee purchaser
contacts a conditional remainder purchaser at the time the
conditional fee purchaser has located a piece of real property he
wishes to purchase. The conditional remainder purchaser can either
approve or decline involvement in the sale, based on a number of
factors. If the conditional remainder purchaser approves of the
sale, a deed with conditional language is drafted, which outlines
the circumstances upon which the fee simple interest will pass to
either the conditional fee purchaser or the conditional remainder
purchaser. The sellers' interests are not affected by the
relationship between the conditional fee purchaser and the
conditional remainder purchaser. From the seller's perspective, the
transaction is a fee simple sale.
The conditional fee purchaser and the conditional remainder
purchaser enter into a conditional fee agreement, which delineates
the rights and responsibilities of each party. These rights include
the requisite payments by the conditional fee purchaser and the
conditional remainder purchaser to the seller, the determination
date, which is the date at which the fee simple interest will vest
in either the conditional fee purchaser or the conditional
remainder purchaser, the conditions upon which the fee simple
interest will automatically vest in the conditional remainder
purchaser, and any other rights agreed upon by the parties.
Using this method, the conditional fee purchaser either finances
his or her payment to seller through a financial institution, or
pays cash, up front, for the conditional fee interest. If the
conditional fee purchaser finances payment through a financial
institution, the conditional remainder purchaser can guarantee
payment on behalf of the conditional fee purchaser to the financial
institution. The conditional remainder purchaser usually pays all
closing costs. Thus, the conditional fee purchaser has the ability
to purchase a home with limited, if any, up front costs. This
ability opens the doors of home ownership to those segments of the
population who previously could only afford to rent real
property.
A deed containing the conditional fee language is recorded by
either the seller or the escrow company after all the normal and
customary residential closing requirements are met.
After closing the conditional remainder purchaser has no
responsibility for the home unless or until the conditions vest fee
simple in the conditional remainder purchaser. The conditional fee
purchaser pays all applicable property taxes until the
determination date, either individually, or through monthly impound
payments. The conditional fee purchaser also pays for hazard and,
if applicable, flood insurance on the property.
On the determination date, if the property has not previously
transferred by operation of a condition to the conditional
remainder purchaser, the conditional fee purchaser either pays the
contractually agreed to amount to the conditional remainder
purchaser and receives the entire fee simple interest, or the
conditional fee purchaser allows the fee simple interest to pass
entirely to the conditional remainder purchaser.
It should be noted that the conditional remainder purchaser, in
some instances, can be the seller of the real property. In other
instances, the conditional remainder purchaser could be the
financial institution, which loans the conditional fee purchaser
the money to pay the balance of the monies owed to seller.
The money to be paid to the conditional remainder purchaser, at the
determination date, can be a price that is fixed at the time the
conditional fee agreement is executed. In the alternative, the
price to be paid at the determination date can be the amount of the
fair market value on or about the determination date.
Advantages of this system include allowing a conditional fee
purchaser to own an interest in real property that may become a fee
simple interest on the determination date. Further, as long as the
property appreciates in value at a high enough rate, the
conditional fee purchaser will gain an equity interest in the
property. This will allow the conditional fee purchaser to have all
the benefits of home ownership, at costs typically associated with
a leasehold interest, and without having to provide a large sum of
money for a down payment and closing costs.
Advantages for the conditional remainder purchaser include the fact
that he or she is equivalent to a landlord, without having any of
the duties, or risks, of a landlord.
The conditional remainder purchaser has no present interest in the
property, aside from a potential future ownership role that is
entirely contingent upon facts outside the conditional remainder
purchaser's control. On the determination date, the conditional
remainder purchaser will either receive a lump sum payment for the
property or the actual real property. Either way, significant
returns on an investment are received by the conditional remainder
purchaser. Further, by offering the CoFOHFS business method to
potential homeowners, the conditional fee purchaser is chosen from
the pool of potential homeowners and, therefore, increases the
potential lending market for financial institutions.
A further advantage to both parties is that both the conditional
fee purchaser's interests and the conditional remainder purchaser's
interests are fully transferable.
Therefore, if the conditional fee purchaser wishes to move, he or
she can either rent or sell his or her interest in the real
property to a third party. If the conditional remainder purchaser
requires cash, he or she can transfer his or her interests to an
investor or other third party.
The CoFOHFS business method enables first-time homeowners to
purchaser real property without large sums of money available to
act as a down payment. In many instances, the first time
homeowner's monthly payment to the financial institution will be
similar to what the homeowner was paying in rent to a landlord.
This makes homeownership available to a larger segment of the
population.
BRIEF DESCRIPTION OF DRAWINGS
FIG. 1 is a flow chart of a CoFOHFS property sale, wherein the
conditional fee purchaser (CFP) pays the seller in cash;
FIG. 2 is a flow chart of a CoFHFS property sale, wherein the
conditional remainder purchaser (CRP) is also the financial
institution (Fi) which loans money to the CFP to cover the CFP's
payment to the seller of the real property;
FIG. 3 is a flow chart of a CoFOHFS property sale, wherein the CFP
receives a loan from a Financial Institution (FI) to pay the
seller; and,
FIG. 4 shows the overall structure of a computer-based system for a
CoFOHFS property sale.
DETAILED DESCRIPTION
Definitions
The terms defined below are more fully defined by reference to the
specification as a whole.
A fee simple absolute is defined as an estate in which the owner is
entitled to the entire property.
A leasehold is defined as an estate in realty held under a
lease.
A conditional fee deed is a form of deed containing conditional
language which, upon the happening of the conditional event, will
divest the ownership rights of the conditional fee purchaser and
vest fee simple ownership in the conditional remainder
purchaser.
A conditional remainder purchaser is an entity (person or business)
purchasing an estate limited to take effect and be enjoyed
dependent upon, or subject to, an event or condition. It should be
understood that the event or condition may never happen or be
performed, therefore, creating a conditional remainder. The
conditional remainder, or conditional interest can also be referred
to as a qualified or defeasible fee simple.
A conditional fee purchaser is defined as an entity (person or
business) purchasing a qualified fee, that is, one which is to be
determined or be defeated by the happening of some contingent event
or condition. Thus, if the event or condition does not happen, the
conditional fee can mature into a fee simple absolute. As with a
conditional remainder, the conditional fee or conditional interest
can be referred to as a qualified or defeasible fee simple.
The present invention relates to a conditional fee ownership home
financing system (CoFOHFS) and business method. Under this method,
a conditional fee simple deed is used to acquire interest in
residential real property at a significant cost savings over
traditional methods of purchasing a home. This system unites
individuals who wish to purchase a home but cannot afford, or do
not have, a down payment for a piece of real property, with third
parties who are willing to act as contingent remainder purchasers
of the fee simple interests. Once the home purchaser, also known as
the conditional fee purchaser, and the third party, or conditional
remainder purchaser, reach an agreement with regards to a specific
piece of real property, they can negotiate with the seller to reach
an agreement with regards to the sales price of the real
property.
At the time of the sale of the real property, the conditional
remainder purchaser provides the down payment and usually the
closing costs for the purchase of the real property. The
conditional fee purchaser provides the seller with the balance of
the costs of the house, either in a lump sum cash payment, as shown
in FIG. 1, or by financing a loan for the remaining balance owed on
the real property, and the closing costs, if not already paid by
the conditional remainder purchaser.
The use of the CoFOHFS has no effect on the seller of the real
property. The seller will receive the full sales price for the real
property at the time the sales contract is executed. After the
sales contract is executed and all of the normal and customary
residential closing requirements are met, either the seller or the
escrow company will record the deed, which contains the conditional
fee language agreed upon by the conditional fee purchaser and the
conditional remainder purchaser. Thus, at the time of the sale, a
conditional fee interest passes to both the conditional fee
purchaser and the conditional remainder purchaser.
This conditional fee interest includes the same rights as a fee
simple absolute. However, it further includes the possibility of
the property being transferred to the conditional remainder
purchaser upon the happening of a particular contingency. If the
condition occurs, then the property will be transferred directly to
the conditional remainder purchaser. If the condition does not
occur, the property will remain under the control of the
conditional fee purchaser, until the determination date. At that
time, the conditional fee purchaser can pay the conditional
remainder purchaser the price agreed to in the conditional fee
agreement and retain the real property or the conditional fee
purchaser can allow possession of the real property to pass to the
conditional remainder purchaser.
The conditional fee agreement reached between the conditional fee
purchaser and the conditional remainder purchaser delineates the
rights and responsibilities of each party. These rights and
responsibilities will normally include the conditional remainder
purchaser providing the closing costs and down payment for the real
property, while the conditional fee purchaser will pay the
remaining balance of the monies owed on the real property to the
seller. A determination date, typically five to seven years from
the date of the contract, at which time the fee simple interest
will vest in either the conditional fee purchaser or the
conditional remainder purchaser, along with an agreement as to what
sum of money the conditional fee purchaser must pay to the
conditional remainder purchaser, in order to obtain a fee simple
interest in the real property on the determination date, must also
be included in the conditional fee agreement. The agreement will
include conditions upon which the fee simple interest will
automatically vest in the conditional remainder purchaser. Finally,
any other rights and responsibilities, which the two parties wish
to cover should be included in the agreement.
Conditions upon which the fee simple interest will automatically
vest in the conditional remainder purchaser normally include: 1.
Failure of the conditional fee purchaser to make a payment on the
determination date of the greater of a fixed dollar amount less
than the fair market value on the determination date, or a fixed
dollar amount above the fair market value at the date the
conditional fee agreement goes into effect; 2. The initiation of
collection and/or foreclosure action by a financial institution
against the conditional fee purchaser; 3. Failure of the
conditional fee purchaser to pay applicable property taxes when
due; and/or, 4. Failure of the conditional fee purchaser to
maintain adequate hazard and, if applicable, flood insurance on the
property.
The conditional fee agreement can be as simple as the conditional
remainder purchaser agreeing to cover closing costs and the down
payment, while the conditional fee purchaser pays the balance owed
to the seller of the real property, along with a determination
date, at which point, the conditional fee purchaser must pay the
conditional remainder purchaser the previously agreed upon price,
or give the conditional remainder purchaser a fee simple interest
in the real property.
In contrast, the conditional fee agreement could be a complex
document, depending upon the conditions included in the agreement
which provide for the conditional remainder purchaser to receive
the real property automatically, and the complexity of how the
payment owed to the conditional remainder purchaser at the
determination date is figured.
As previously noted, in most instances, the conditional remainder
purchaser agrees to pay closing costs and the down payment for the
real property. Thus, it is the conditional fee purchaser's
responsibility to either pay the seller the rest of the monies due
as a lump sum cash payment, or receive financing from a financial
institution. In the majority of cases, the conditional remainder
purchaser will be the financial institution, as shown in FIG. 3,
which loans the money to the conditional fee purchaser, as shown in
FIG. 2. The seller is not affected by the fact that the house is
being purchased using the CoFOHFS business method.
The determination date can be any date to which the parties agree.
This is the date at which the fee simple interest will vest in
either the conditional fee purchaser or the conditional remainder
purchaser. Although the typical period will be five to seven years
it is clear that the determination date may be any date in the
future to which the conditional fee purchaser and the conditional
remainder purchaser agree. The reason five to seven years is
preferred is that currently most homeowners change houses or
relocate every five to seven years. Therefore, the CoFOHFS is set
up so that the fee simple interest will vest in either the
conditional fee purchaser or the conditional remainder purchaser at
the same time as the conditional fee purchaser may be considering
relocating.
The conditions upon which a conditional fee interest will
automatically vest in the conditional remainder purchaser can be
any conditions to which the two parties agree. In most instances,
these conditions will include the failure of the conditional fee
purchaser to make a payment on the determination date that is the
greater of either a fixed dollar amount less than the fair market
value of the real property on the determination date, or a fixed
dollar above the fair market value of the real property at the date
the conditional fee agreement goes into effect, the initiation of
collection and/or foreclosure actions by the financial institution
against the conditional fee purchaser, failure of the conditional
fee purchaser to pay applicable property taxes when due, and
failure of the conditional fee purchaser to maintain adequate
hazard insurance and, if applicable, flood insurance on the home.
The conditional fee purchaser and the conditional remainder
purchaser can also agree to add further conditions, the occurrence
of which will automatically vest the fee simple interest in the
conditional remainder purchaser. Thus, the conditional fee
agreement can be directly tailored to fit the requirements of the
parties involved.
Once the conditional fee purchaser and the conditional remainder
purchaser agree to terms for their conditional fee agreement, and a
piece of real property is located, which the conditional fee
purchaser wishes to purchase, and which has the approval of the
conditional remainder purchaser, a sales contract can be entered
into with the seller of the real property. At that point, the
conditional fee purchaser can pay cash up front for his conditional
fee interest, or he can finance his payment through a financial
institution. Meanwhile, the conditional remainder purchaser will
pay the down payment and the closing costs to the seller and, in
most cases, guarantee payment on behalf of the conditional fee
purchaser to the financial institution, if the conditional
remainder purchaser is not, himself or herself, the financial
institution financing the purchase.
Once the sales contract is executed by all parties, the seller, or
the escrow company involved in the sale, will record the deed which
contains the agreed conditional fee language. This will be done
after all the normal and customary residential closing requirements
are met. As shown, use of the CoFOHFS business method does not
affect the seller. The seller still receives full payment for his
real property.
After the completion of the sale of the real property, the
conditional remainder purchaser has no further responsibility for
the real property unless or until the conditions vest feel simple
interest in the conditional remainder purchaser. At this point, the
conditional remainder purchaser is the equivalent of a dutiless
landlord. The conditional remainder purchaser has no present
interest in the real property. The only interest the conditional
remainder purchaser has in the real property is a potential future
fee interest, which is entirely contingent upon factors outside the
conditional remainder purchaser's control.
At the determination date, if the conditional remainder purchaser
has not yet received the real property, he or she will receive a
significant return on his or her investment. This return will be in
the form of either a lump sum payment from the conditional fee
purchaser, as agreed to in the conditional fee agreement, or a
transfer of the entire interest in the real property to the
conditional remainder purchaser. The rate of return on the
conditional remainder purchaser's investment depends upon the rate
at which the property appreciates in value during the determination
period. Further, the conditional remainder purchaser's interest is
fully transferable throughout the determination period. If the
conditional remainder purchaser needs to raise cash, he or she can
transfer or sell his or her interest to an investor or a third
party. Therefore, the conditional remainder purchaser's interest is
a current asset, which has current cash value and is easily
liquidated.
If a condition occurs which vests the fee simple interest in the
conditional remainder purchaser prior to the determination date,
then the conditional remainder purchaser becomes the owner of a fee
simple interest in the property. At that point, the conditional
remainder purchaser will be responsible to the financial
institution used by the conditional fee purchaser to finance the
conditional fee purchaser's portion of the house payment. The
conditional remainder purchaser will also be responsible for
property taxes and insurance. Once the fee simple interest vests in
the conditional remainder purchaser, he or she has all the
responsibilities of ownership of the real property.
After the sale of the house is finalized, the conditional fee
purchaser, for all intents and purposes, is the owner of the real
property. Thus, the conditional fee purchaser has become a
homeowner without having to pay closing costs or a down payment.
Further, in most instances, the conditional fee purchaser's monthly
payments will be less than or equal to what they would have paid if
they had to finance the fee interest. These monthly payments will
usually be equivalent to what the conditional fee purchaser was
previously paying in rent to a landlord. Thus, for an amount of
money similar to a monthly rent payment, the conditional fee
purchaser can become a homeowner. The conditional fee purchaser
receives all the tax advantages of home ownership. Further, if the
real property purchased under a CoFOHFS appreciates in value, the
conditional fee purchaser has the ability to earn equity interest
in the property.
On the determination date, if the property has not previously
automatically transferred by operation of a condition to the
conditional remainder purchaser, the conditional fee purchaser will
either pay the contractually agreed upon amount to the conditional
remainder purchaser for the fee simple interest, or allow the fee
simple interest to pass in its entirety to the conditional
remainder purchaser.
In one embodiment of this business method, the conditional
remainder purchaser and the seller are the same entity. The
conditional fee purchaser and the seller/conditional remainder
purchaser, agree to a purchase price for the sale of the house. At
the time the sales contract is executed, the conditional fee
purchaser pays the seller the purchase price agreed to, less the
down payment and closing costs for the sale. In this situation, the
seller will credit the conditional fee purchaser with regards to
the down payment, and cover any closing costs involved in the
sale.
In another embodiment of the business method, the conditional
remainder purchaser (CRP) and the financial institution (Fl) used
by the conditional fee purchaser (CFP) to finance the conditional
fee purchaser's payment to the seller, are the same entity, as
shown in FIG. 2. In this embodiment, the conditional remainder
purchaser does not guarantee payment of the conditional fee
purchaser's obligation to the financial institution. This
embodiment represents the situation in the majority of house sales
which use the CoFOHFS business method. Thus, in most instances, the
conditional fee purchaser will approach a financial
institution/conditional remainder purchaser and negotiate a
conditional fee agreement prior to purchasing a house. This
embodiment highlights the advantage of the CoFOHFS business method
versus the typical home loan purchase method. In the typical home
loan purchase method, the potential homeowner must have sufficient
money saved to cover the down payment and closing costs at the time
of approaching the financial institution. Under the CoFOHFS
business method, the conditional fee purchaser approaches a
financial institution without the need for having large sums of
money in savings, or the ability to pay the down payment or the
closing costs. Thus, under the CoFOHFS business method, the
conditional fee purchaser can purchase the house with the aid of a
financial institution with little or no money down.
Other embodiments are drawn to the price to be paid to the
conditional remainder purchaser at the determination date. One
embodiment would have a fixed price to be paid to the conditional
remainder purchaser at the time the contract for the conditional
fee interest is entered. Under this embodiment, both the
conditional fee purchaser and the conditional remainder purchaser
are speculating that the value of the real property will have
increased by the determination date.
In an alternate embodiment, the price to be paid to the conditional
remainder purchaser at the determination date is the amount of the
fair market value of the real property on or about the
determination date. The parties could also agree that the amount to
be paid at the determination date would be based on the fair market
value, less a certain amount of money.
Another embodiment of this invention includes a computer-based
system, as shown in FIG. 4, which illustrates a computer-based
system for a conditional fee ownership home financing system and
business method in accordance with the present invention.
Information concerning the potential conditional fee purchaser and
the conditional remainder purchaser and/or the potential financial
institution can be stored, managed, and updated, at a central site
20. The central site 20 may include, for example, one or a
plurality of server systems 22 (each including, for example, a
processor, memory, and various peripheral devices). The central
site may also include a number of databases 29 (stored on storage
devices) coupled to one or more of the server systems 22.
The conditional fee remainder purchaser and/or the financial
institution, may access and update the information in their data
files using, for example, a conditional remainder
purchaser/financial institution workstation 26 coupled to the
central site 20 via a network 28. The network 28 may include, for
example, a telecommunication network, a local area network, a wide
area network, the Internet, etc. Of course, it is also possible
that the workstations used by the conditional remainder purchaser,
and/or the financial institution are directly coupled to the
central site 20. The workstations 26 may be required to log-in to
one of the server systems in order to access and update information
on the particular entity of interest. Most likely, the entire
system will be set up so that the conditional remainder purchaser
and/or the financial institution will have direct access to the
central site after logging into one of the server systems 22. This
will allow the conditional remainder purchaser and/or the financial
institution to update information in the database(s) 29 on a
regular schedule.
Conditional fee purchasers may request or access information
concerning potential conditional remainder purchasers, and/or
financial institutions, using a conditional fee purchaser
workstation 30 coupled to the central site 20 via a network 32. The
network 32 may include, for example, the Internet, and conditional
fee purchaser workstations 30 may be provided secure links to the
central site 20 for some types of transactions, or for reviewing
information with regards to the conditional remainder purchaser
and/or financial institutions taking part in these transactions.
Other networks, such as a telecommunications network, a local area
network, a wide area network, etc., are, of course, possible. Each
conditional fee purchaser workstation 30 may be required to log-in
to one of the servers 22 at the central site 20 in order to access
and/or update information with regards to the conditional fee
purchaser.
In accordance with the present invention, data, with regards to
conditional fee purchasers, conditional remainder purchasers, and
financial institutions, along with minimum guidelines, with regards
to potential conditional fee purchasers, can be input, for example,
from the conditional remainder purchaser's workstation 26 or the
financial institution's workstation 26, and stored in databases 29
at the central site 20.
Once a conditional fee purchaser approaches the conditional
remainder purchaser or the financial institution, information on
the conditional fee purchaser can also be input via the conditional
remainder purchaser's workstation 26 and stored in the databases 29
at the central site 20.
The conditional fee purchaser and the conditional remainder
purchaser can negotiate the terms of their conditional fee
agreement using their respective workstations 26 and 30, which are
coupled to the central site 20 via networks 28 and 32. Details of
the conditional fee agreement can then be stored in the databases
29 at the central site 20.
Based on the present invention, the conditional remainder purchaser
and/or the financial institution may negotiate with the conditional
fee purchaser using a computer rules-based system (other systems
are possible). For example, the conditional remainder purchaser can
have a set of specific guidelines, which the conditional fee
purchaser must meet in order for the conditional remainder
purchaser to agree to participate in the conditional fee agreement.
Using the rules-based system, the information the conditional fee
purchaser provides to the conditional remainder purchaser through
the network 32 can be compared to the guidelines (the stored rules)
stored in the database 29. Thus, these steps can be performed
automatically at the central site 20.
Alternatively, the guidelines, which are stored in the database 29,
can be printed out by the conditional remainder purchaser, and/or
the financial institution, so that the conditional remainder
purchaser and/or financial institution can manually compare the
information provided by the conditional fee purchaser with the
guidelines to determine if the conditional fee purchaser meets the
guidelines.
Once the conditional remainder purchaser and/or financial
institution reviews the conditional fee purchaser's information in
light of the guidelines, an indication that the conditional fee
purchaser has been approved or rejected can be transmitted to the
conditional fee purchaser electronically via the central site 20.
Alternatively, the conditional remainder purchaser and/or the
financial institution may provide the indication via the telephone
or mail.
If the conditional fee purchaser meets the guidelines, as required
by the conditional remainder purchaser and/or financial
institution, then the conditional fee agreement can be entered into
by the conditional fee purchaser and the conditional remainder
purchaser, and the conditional fee purchaser and conditional
remainder purchaser can proceed to contact the seller of the real
property of interest to negotiate a sales contract.
EXAMPLES
Example 1
Potential Homeowner/Conditional Fee Purchaser (CFP) wishes to
purchase a newly constructed, customized home from seller, for
$100,000. CFP is unable to purchase the home because of the closing
cost and down payment requirements. CFP contacts third
party/conditional remainder purchaser (CRP) a company utilizing
CoFOHFS to purchase contingent remainder interests in real
property. CFP wants to enter into a conditional fee financing
arrangement. CRP negotiates with CFP and they mutually agree to the
following terms: 1. A determination date five-years from the date
the sale closes. 2. CFP agreeing to pay CRP on the determination
date the greater of a. $110,000 or b. $10,000 less than the
appraised value of the property at the end of the five-year
determination period. 3. CFP paying to seller $35,000 (Financed
through a financial institution for a length of time no greater
than the length of time for the determination date, in this case 5
years). 4. CRP paying to seller the remaining $65,000 of the
$100,000 Fair Market Value (FMV). 5. CRP paying all closing costs
in the transaction with seller. 6. CRP becoming fee simple owner
if: a. CFP defaults on his obligation to financial institution
before the determination date (at which point CRP assumes the
liability for CFP's debt to financial institution); or b. CFP fails
to pay the greater amount of either i. $110,000 or ii. $10,000 less
than the FIMV at the determination date.
Assuming the property appreciates in excess of 2% a year, CFP will
begin having psuedo-equity in the property, and, based on the above
assumptions, have up to $10,000 worth of interest in the property
on the determination date.
For example, if the property appreciates an average of 4% a year,
the property would have a FMV of approximately $121,000 on the
determination date. CFP, under the terms of the conditional
agreement, would have the right to pay CRP $111,000 for a home with
a value of $121,000. CFP, as a property owner, would have the right
to make the $111,000 payment himself, sell the fee interest to a
third party for up to $121,000, paying $111,000 to CRP and keep any
profit (as long as the amount paid to CRP is calculated in
accordance with the terms of the conditions) or allow the fee
simple interest to pass in its entirety to the conditional
remainder purchaser.
During the course of the determination period, CFP is just like any
other fee simple owner, paying property taxes (probably escrowed
out from monthly payments if financed), and interest on the note.
In all likelihood, unless IRS rules change, CFP would be able to
take advantage of tax credits typically unavailable to a tenant,
but available to a homeowner as CFP is the owner of the fee
interest that is merely subject to conditions.
Additionally, the monthly payment compared to standard fee
purchasing is likely less than a conventional financing structure.
For example, a loan payment with escrowed property taxes, hazard
insurance and Mortgage insurance (MIP) on a $100,000 fee simple
purchase would be close to $1,000 per month, the five year
financing of $35,000 plus taxes and hazard insurance (no MIP if CRP
guarantees payment), would result in a payment between $850-$900 a
10-15% discount over conventional purchasing.
During the course of the determination period, CRP is only
passively involved and has no current ownership interest aside from
the conditional remainder interest. CRP does not face liability for
any hazards on the property during the time its interest is merely
contingent, as CRP does not have any control over whether or not
the fee interest will vest in either party.
Thus, there has been shown and described a conditional fee
ownership home financing system and business method. It is apparent
to those skilled in the art, however, that many changes,
variations, modifications, and other uses and applications for the
system and business method are possible, and also such changes,
variations, modifications, and other uses and applications which do
not depart from the spirit and scope of the invention are deemed to
be covered by the invention, which is limited only by the claims
which follow.
* * * * *
References